Canada’s move to fully legalize cannabis for adult recreational use on Wednesday has set the stage for the development of a new industry that is expected to generate billions of dollars in revenue.

To mark the occasion, MarketWatch profiled the six main players in the emerging sector, all of which are listed on the Toronto Stock Exchange and on U.S. exchanges or on the over-the-counter market. But there are many smaller players, too, some of which remain private companies, and many new players are expected to emerge in the coming months.

But, as the Securities and Exchange Commission has warned, not every company that is currently promoting itself as a cannabis player will survive, and, as with any emerging sector, there is a lot of potential for scams. Investors need to do their homework, especially when it comes to penny stocks, which are not as tightly regulated as those that trade on major exchanges.

Following — and this is not an endorsement to buy — are five companies that we believe are worthy of attention:

Green grass

Green Organic Dutchman Holding Inc.
TGODF, -2.73%
(
TGOD, +1.40%
is an Ontario-based company that prides itself on its organic cultivation and commitment to growing cannabis without the use of synthetic pesticides. The company is listed on the TSE and the U.S. OTC market. It has funded capacity of 170,000 kilograms and is building 1,382,000 square feet of cultivation facilities across Ontario, Quebec and Jamaica.

The company’s name is likely to give it a surprising advantage in the new legal recreational market. For now, the packaging on cannabis products is federally mandated and allows only for the company’s name and type of product, alongside health warnings. That means Green Organic Dutchman will be able to promote its organic mission, something other organic growers that do not have the word in their names will be unable to communicate through packaging. As the market will be mostly conducted online for now, that gives it a key competitive benefit.

Earlier this week, Green Organic Dutchman announced that it has received a medical-marijuana license from Health Canada, the Canadian health ministry, for its facility in the Ancaster section of Hamilton, Ontario. But the company is also planning to tap the recreational market in the second quarter of 2019. It has supply agreements in Canada, Europe, Jamaica and Latin America and ambitions to expand its medical business across the world.

Just one analyst on FactSet is currently following the stock. Fundamental Research Corp.’s Anthony De Ruijter rates the stock a buy with a price target of C$9.20, or about 120% above its current trading level.

Medical pot from Quebec

Then there’s Hexo Corp.
HEXO, +9.68%HEXO, +9.68%
a licensed producer and distributor of medical marijuana based in Gatineau in western Quebec. The company was founded in 2013 and made its first medical-cannabis sales in May 2015, according to its website.

Geoff Parkin for the TSX

Like many others, Hexo is planning to expand into the recreational market and is working to grow production capacity. For now, it has more than 310,000 square feet of capacity and is adding another 1 million square feet, which is expected to be ready by year-end. It will serve the adult recreational market through its Hexo brand and continue its medical offering through its Hydropothecary brand.

In its third fiscal quarter, which ended April 30, the company sold 134.3 kilograms of cannabis, down from 137.1 kilograms in the same period a year ago. The company sold the weed at an average of C$9.24 per gram (US$7.12), up from C$8.62 a year ago. Its weighted average cash cost of dried inventory was 88 cents, down from C$2.06 a year ago. The company says that metric includes direct costs associated with the growing, harvesting and processing of inventory sold such as labor, utilities, fertilizer, curing, milling and testing.

The six analysts who cover the stock all rate it as a buy, with a mean price target of C$9.25, about 18% above its current trading level.

CannTrust

Then there’s CannTrust Holdings(
CNTTF, -1.43%TRST, +8.86%
a medical-marijuana company based in Vaughan, Ontario, with a stock that is listed on the TSX as well as on the U.S. OTC market.

CannTrust is also planning to tap Canada’s now legal adult market and is expanding its production facilities. It currently has a 450,000 square foot facility in the municipality of Niagara and is adding another 600,000 square feet.

In early October, CannTrust hired a new chief executive, Peter Aceto, former CEO of Tangerine Bank, the old ING Direct.

Seven FactSet analysts cover the stock, and all rate it buy, with a mean price target of C$16.93, or 25% above its current trading level.

Aleafia

Aleafia Health Inc.
ALEAF, -0.49%ALEF, +6.75%
is a Toronto-based medical-cannabis company that boasts more than 50,000 patients across Canada. That company is listed on the TSX and the U.S. OTC market and has applied to list on Nasdaq.

Aleafia had total funded capacity of 317,000 square feet at the end of June, according to its website, and expects to have 16,500 kilograms of annualized production by year-end. It expects to grow its funded capacity to 38,000 kilograms in 2019. It has 22 medical clinics across Canada and has partnered with Cronos Group on a study of cannabis as a treatment for insomnia.

Mackie Research is currently alone in covering the stock on FactSet. Analyst Greg Mcleish has a buy rating on the stock and a share-price target of C$6.50, or 102% above its current trading level.

Extracting value

Valens Groworks Inc.
US:MYMSF
specializes in extraction via its own proprietary processes. The company operates through three wholly owned subsidiaries, Valens Agritech, Valens Farms and Supra THC Services, processing more than 78,000 kilograms of cannabis a year. The Kelowna, B.C., company started life in 1981 as a mineral exploration company and remained in the resource business until oil prices began to slide in 2014.

Valens has said it has a 17,000-square-foot extraction and grow facility in British Columbia. On Oct. 10, it closed a $27.3 million bought deal offering of units priced at C$1.95 each, proceeds of which are to be used to increase extraction capacity, enlarge the company’s geographic footprint in Canada and for general corporate purposes.

Valens has three licenses to allow it to transition from medical cannabis to the recreational market. It has a multiyear agreement with Seattle-based Tarukino Holdings Inc. to expand into the cannabis-infused drinks, edibles and topical markets.

There are currently no FactSet analysts covering Valens’s stock.

The Horizons Marijuana Life Sciences Index ETF
HMMJ, +2.16%
, which tracks 49 cannabis companies in North America, has gained 41% in the past three months, while the S&P 500
SPX, +1.32%
has risen 2% and the Dow Jones Industrial Average
DJIA, +1.38%
has edged 0.5% upward.

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